CAS Exam 7 Spring 2015, Question 20
Study guide: Exam 9
Given the following information for an insurer's gross aggregate loss distribution:
| Item | Value |
|---|---|
| Expected value | $20,000,000 |
| 90% VaR | $50,000,000 |
| Limited expected value at $50,000,000 | $8,000,000 |
- The capital requirement is set at 90% TVaR.
The insurer is evaluating the impact of two reinsurance options from a reinsurer that has received a B credit rating from a widely recognized rating agency. Assume a 60% charge for reinsurance recoverable credit risk associated with this reinsurer.
Option 1
- Excess-of-loss reinsurance
- Attachment: $50,000,000
- Limit: $100,000,000
- Expected ceded loss: $7,500,000
Option 2
- Quota share reinsurance
- 40% ceding percentage
- No ceding commission
Part a (1.25 points)
Calculate the net capital requirement for the insurer if Option 1 is purchased.
Part b (0.75 points)
Calculate the net capital requirement for the insurer if Option 2 is purchased.
Part c (0.5 points)
Briefly describe two challenges of assessing the impact of reinsurance on the insurer's risk profile.
Part d (0.5 points)
Briefly describe two ways the insurer may be able to lower its reinsurance recoverable credit risk exposure.
Answer this question and see the worked solution